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CORPORATE GOVERNANCE IN NIGERIA; THE GROWING NEED TO DEEPEN INVESTOR CONFIDENCE

By Harrison Ogalagu1
At the start, boards of directors were generally weak, executive management was in charge and shareholders were dispersed. Gathering investor pressure on the directors of under-performing companies, however, led to a strengthening of boards at the expense of management. This in turn developed into the present position whereby the concentration of shares in the hands of institutional investors has increased their power in relation to boards and management and, at the same time, drawn attention to their responsibilities in matters of governance

Sir Adrian Cadbury

1.0

Introduction

The potential of an economy to attract investment depends largely on the state of governance of the economy and the policy thrusts of the managers of the economy. The primary duty of the managers of an economy is to use and maximize the limited resources of the economy efficiently to achieve the objectives of the economy. Such is the case with companies or corporations. The world has witnessed, in the recent past, an endemic financial crisis and gradual collapse of most multinational corporations. Recent cases of corporate governance failure in large companies have drawn the ire of investors, boards, companies, regulators and indeed governments on the threat posed to the integrity of financial markets and economic development2. Investor sentiments are a crucial issue for any company. If the investor confidence is high, the share price of the company soars. If the investor confidence weakens, the value of the stock plummets. Therefore, it is crucial for a company to keep its investors in mind before taking important decisions and to maintain a flawless management quality. The recent spate of corporate scandals has drained investor confidence to an all time low. Many investors use their savings, including pension funds, profits or capital reserves to invest

1. 2.

HARRISON OGALAGU, LLB (HONS), BL, Senior Associate, Tope Adebayo LLP F. Ajogwu, Corporate Governance in Nigeria: Law & Practice, Lagos, 2007

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in the equity of a company. They are set to lose a lot in case of financial mismanagement by the company. Therefore, the quality of corporate governance is a key issue for them. In recent years, corporate governance has received increased attention because of high-profile scandals involving abuse of corporate power and, in some cases, alleged criminal activity by corporate officers. As the role of capital market in the Nigerian economy evolves, greater corporate transparency is required to allow governments, companies, investors and entrepreneurs to react to underlying economic problems and/or challenges more proactively. Lack of effective corporate governance in Nigeria has worked to the detriment of shareholders and created a class of shareholders who have lost interest in the system. The corporate governance culture in Nigeria has consistently failed to be responsible to the stakeholders, accountable to the shareholders and has no deep-rooted mechanism to maintain a balance among the major players (board of director, shareholders, and management) in corporate governance. These have occasioned renewed calls for total revamp of corporate governance principles to ensure more efficient use of company assets which in turn will translate into higher profitability of investments. This paper critically x-rays the telling effect of corporate governance principles on investor confidence with particular emphasis on the Nigerian experience; the challenges and failure of corporate governance in Nigeria. It also seeks to offer recommendations on policy framework in respect of how good corporate governance guidelines and practices would boost investor confidence, enhance the credibility of regional businesses leading to lower capital costs, increased foreign direct investment (FDI), greater financial stability and long-term growth. 2.0 Corporate Governance: An overview

Corporate governance is defined as the set of laws, policies, customs, processes and institutions designed to control the way a corporation is administered3. Corporate governance is largely concerned with organizational and management performance in a company. It is a term that refers broadly to the rules, processes, or laws by which businesses are operated, regulated, and controlled. The term can refer to internal factors defined by the officers, stockholders or
3. Lead Capital, Guardian Newspapers, March 21, 2011.

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constitution of a corporation, as well as to external forces such as consumer groups, clients, and government regulations. Corporate governance has also been seen to be concerned with ways in which all parties interested in the well-being of the firm (the stakeholders) attempt to ensure that managers and other insiders take measures or adopt mechanisms that safeguard the interests of the stakeholders. Such measures are often necessitated by the separation of ownership from management, an increasingly vital feature of the modern firm4 Corporate governance is also defined as the system by which companies are directed and controlled5. In a nutshell, corporate governance revolves round how an organization is managed, its corporate and other structures, its culture, policies and the ways it deals with its various stakeholders. The plank of corporate governance is how to harness the structures and processes of decision-making in a company in the light of the control and behavior that support effective accountability for performance outcomes. 6 It is also concerned with the interplay of the elements which encourage companies to produce good quality and timely information and to have a formal and thorough evaluation and decision-making process that is robust and credible, which will ultimately make them transparent and accountable. According to Ajogwu7, corporate governance is used to monitor whether outcomes are in accordance with plans, and to motivate the company to be more fully informed in order to maintain or alter organizational activity. Corporate governance can also be seen in terms of the ways in which a firm safeguards the interests of its financiers (investors, lenders, and creditors). The modern definition calls it the framework of rules and practices by which a board of directors ensures accountability, fairness, and transparency in the firm's relationship with all its stakeholders (financiers, customers, management, employees, government, and the community). This framework consists of:

4. 5.

Martha Bruce, Rights and Duties of Directors 9 Ed., London, 2009 A. Sanda, et al, (2005) Corporate Governance Mechanisms and firm financial performance in Nigeria

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1. 2.
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explicit and implicit contracts between the firm and the stakeholders for distribution of responsibilities, rights, and rewards, procedures for reconciling the sometimes conflicting interests of stakeholders in accordance with their duties, privileges, and roles, and procedures for proper supervision, control, and information flow to serve as a system of checks and balances.

Modern conglomerates are characterized by numerous owners having no management function and managers without equity interest in the company whatsoever. Shareholders, or owners of equity, are generally large in number, and an average shareholder controls a minute proportion of the shares of the firm. This gives rise to the tendency for such a shareholder to take no interest in the monitoring of managers, who, left to themselves, may pursue interests radically different from those of the owners of equity. Oftentimes, managers take steps to increase the size of the firm which may translate into increased pay for them without a corresponding increase in the profit of the firm which is the major concern of the shareholders and stakeholders. Concerns have, therefore, been raised to resolve the perceived incongruence in the interests of the equity owners and managers of the firm in respect of which codes of corporate governance have evolved. Although codes of corporate governance may differ as dictated by its goals which vary from country to country but there is a confluence of opinion that effective corporate governance relates to the promotion of the shareholders and stakeholders of a company. When governance procedures are operating successfully, the needs of the shareholders and stakeholders are being effectively met through the directing and controlling of management activities7. An indispensable ingredient of corporate governance is the nature and extent of accountability of certain individuals in the organization, and mechanisms that try to eliminate the principal-agent problem associated with corporations. Well-defined and enforced corporate governance provides and structure that, at least in theory, works for the benefit of everyone concerned by ensuring that the enterprise adheres

6. Lead Capital, op cit.

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to accepted ethical standards and best practices as well as to formal laws in management and operation. This is the goal of international best practices for corporate governance. 3.0 DEVELOPMENT OF CORPORATE GOVERNANCE

Corporate governance has started gaining popularity when directors were increasingly required to demonstrate and report to those with an interest in the company about the procedures, systems and controls they have put in place to achieve results, improve accountability and prevent malpractice or fraud. The origin of corporate governance has a long history but a recent past. In so many jurisdictions, several reasons have been adduced as responsible for the development of corporate practice and its role in modern corporations. Some of the experiences include the Wall Street Crash of 19298, the East Asian Crisis of 199710,

7.

The crash followed a speculative boom that had taken hold in the late 1920s, which had led hundreds of thousands of Americans to invest heavily in the stock market. A significant number of them were borrowing money to buy more stocks. By August 1929, brokers were routinely lending small investors more than two thirds of the face value of the stocks they were buying. The rising share prices encouraged more people to invest; people hoped the share prices would rise further. The speculation thus fuelled further rises and created an economic bubble. Because of margin buying, investors stood to lose large sums of money if the market turned downor even failed to advance quickly enough. The Roaring Twenties, the decade that led up to the Crash, was a time of wealth and excess. Despite caution of the dangers of speculation, many believed that the market could sustain high price levels. However, the optimism and financial gains of the great bull market were shattered on "Black Thursday", October 24, 1929, when share prices on the New York Stock Exchange (NYSE) collapsed. Stock prices plummeted on that day, and continued to fall at an unprecedented rate for a full month. The causes of the Asian crisis include governments' futile attempts to keep their currencies at artificially high levels; government-directed banking systems and lending decisions; unregulated capitalism; massive overinvestment by corporations funded by excessive borrowing; the lack of transparency that masked the extent of problems they developed; inadequate financial regulation and supervision; labour market "rigidities", and a pronounced mismatch in the duration of assets and liabilities in both the corporate and banking sectors. Perhaps the biggest contributor to the Asian financial crisis of 1997 is its gross misallocation of capital and human resources, combined with a flagrant disregard for the bottom line. This misallocation of capital and human resources caused by the lack of corporate governance had resulted in the widespread value destruction by Asian companies, which in turn had led to a lower value for the overall economy and weakened the banking sector. Underlying all of these weaknesses were pervasive moral hazards -- "heads I win, tails someone else loses" philosophy. Banks, investors, and business firms assumed that governments and international organizations would bail them out in the event of financial catastrophe. Such a moral hazard had created incentives for risky behavior on the part of developing countries and international investors.

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the American corporate crises9 , etc. In Nigeria, the scary complaints of lapses in the senior management team of corporations, e.g., Cadbury, and the apathy of boards of directors to ensure adequate review of system of corporate governance in compliance with the laws and regulations guiding their different industries, coupled with inadequate systems to review and approve material changes in accounting principles have continued to put corporate governance in the front burner12. Research has shown that in the Nigerian context, board members (executive or non-executive) are handpicked, not independent and are not necessarily bound (legally or by default) to place higher value on shareholders interest nor protect the business interest , let alone the interest of stakeholders13. Preponderance of opinion indicates that in Nigeria, too much power is concentrated on the Chief Executive Officer (CEO), and CEOs, more often than not, are also the Chairmen of the Boards of Directors. This lack of checks and balances compromises the ability to make independent decisions on behalf of the shareholders. There is also lack of law enforcement capacity to implement the corporate governance codes of conduct in Nigeria, lack of thorough selection, evaluation and replacement of CEOs. Pathetic also is the fact that retired or replaced CEOs are graduated to membership of the board which creates not only lots of conflict and tensions with the new CEOs, but also, presents an opportunity for continuous connivance or conspiracy to perpetuate corporate mischief. According to Mallin10, the practical lesson to be learnt from the collapse of one of the major players in corporate governance, i.e., when the agent is not acting in the best interest of the
9. U.S. firms, e.g., Enron and WorldCom, enjoyed boom for a long time and their operations approached maturity and profits were diminishing. From this point onwards accounting scandals generated, when the firms inflated real profits and even exaggerated projections for the profits only to attract both local and global investors and to support stock prices. But when the reality surfaced, big giants lost credibility and some of them filed bankruptcies. Subsequently, American stock markets were hit hard. In the wake of this, both local and global investors pulled out capital from the U.S. assets and invested somewhere else in search of higher returns at low risks.

10. H. A. Quadri, (2010), Conceptual Framework for Corporate Governance in Nigeria Challenges and Panaceas. 11. Oyejide T. A. and Soyibo A. (2001), Corporate Governance in Nigeria, Development Policy Centre, Ibadan 12. Mallin C. A. (2010), Corporate Governance, 3 Edition, New York, Oxford University Press 13. Terms of reference of Asset Management Corporation of Nigeria Act, 2010 14. F. Ajogwu op.cit
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principal by taking inappropriate risks, because the board is not providing the oversight to minimize agency problems or colluding with the agents to take inappropriate risks, the result is huge agency cost, incidence of which causes economic bleeding to the organization. Across the world, the ongoing global financial crisis has compelled governments to pay the huge agency cost with the bail-out payments which further plunged the global economy into more deficit, as witnessed in the Nigerian Banking industry and the attendant establishment of AMCON15. 4.0 FUNDAMENTAL PRINCIPLES OF CORPORATE GOVERNANCE

Despite the propagation of several theories of Corporate Governance, aggregate of opinion recognizes fundamental elements of good corporate governance. These ingredients include: (A). EQUAL RIGHTS AND TREATMENT OF SHAREHOLDERS.

An attribute of good corporate governance is the recognition of equal rights and privileges to all shareholders irrespective of class and provision of adequate framework to ensure the protection of the rights16. This implies that companies should not have classes of shares with disparate or weighted voting rights. To foster the protection of the rights of shareholders, effective system of information dissemination and accessibility should be set in place to encourage participation of shareholders in general meetings where most business operations and financial management policies are discussed and poll conducted in deserving cases. (B). THE ROLE AND RESPONSIBILITIES OF THE BOARD OF DIRECTORS

Corporate governance is a board priority as directors are increasingly required to demonstrate and report to those with an interest in the company about the procedures, systems and controls they have put in place to achieve results, improve accountability and prevent malpractice or fraud. A fundamental principle in common law is that the directors duties are owed to the company as a whole and not to individual members 11. This implies that the duties of the directors are to be discharged in the interest of stakeholders in the company as the interest of the company cannot be divorced from the interest of the stakeholders18. The all-

15. Percival Vs. Wright (1902) 2 Ch 421; Perskin Vs. Anderson (2001) 1 BCLC 372 16. Brady Vs. Brady (1988) BCLC 20 @ 40; Gower, (2003), Principles of Modern Company Law, (7
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Edition)

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inclusive duties of the directors are also owed to the employees, creditors and shareholders of the company. Thus, the Board of Directors should be composed in a manner that will reflect core competence, skill and understanding of various business strategies or policies with the requisite expertise to review and challenge management performance. The Board should have sufficient spread and size with an appreciable level of commitment to fulfill its duties and responsibilities. The Board should respond promptly to communications from shareholders and often times seek shareholder views on important governance, management and performance matters. The Board should also take actions recommended in shareholder proposals that receive a majority of votes cast for and against. If shareholders approval is required for the action, the Board should submit the proposal to a binding vote at the next shareholder meeting. The Board should neither be too small to maintain the needed expertise and independence, nor too large to be efficiently functional12. In the absence of compelling or unusual circumstances, a board should have no fewer than 5 and not more than 15 members. Shareholders should be allowed to vote on any major change in board size. There should also be guidelines on share qualification of persons who are to serve on the board and limits should be set as to how many companies a single individual can serve on their board as a director or chief executive officer (CEO)
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. Directors should receive training

from independent sources on their fiduciary responsibilities and liabilities as there is an obligation on the board to remain independently familiar with company operations without the necessity of relying on information provided by the CEO. There should be a regular forum for the board and management to discuss board issues and management policies. The board should be composed as to have both independent and non-executive directors. The importance of a board with majority independent members is that it translates into more power in the board to implement board decisions, even where such go against the wishes of

17. F. Ajogwu, Op cit 18. Sections 275, 276 & 277 of CAMA

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the management or majority shareholders. This does not only create a desirable board culture but also imposes a responsibility on the board to be diligent in making decisions. Moreover, an independent board majority is a key structure to assure shareholders that their investment will be protected as the company is run competently in the best interest of the shareholders. It also reduces the risk of conflict of interest as well as diminishes agency costs.

(C)

INDEPENDENCE OF THE AUDITOR/AUDIT COMMITTEE

This element of good corporate governance is to ensure that auditors are limited to performing services required by statute or regulation, companys management and the audit committee of the board of directors should evolve an audit independence policy and compliance should be monitored by the board of directors. Audit committee of the board should be composed of independent directors. Furthermore, in engaging external auditors services, the audit committee or the full board, not the company, should be designated as the auditors client. This is to avoid the management of the company from compromising the auditor or engaging the auditor in the performance of non-audit services. (D) INTEGRITY AND ETHICAL BEHAVIOUR

Ethical and responsible decision making process is pivotal in not only public relations, but it is also a necessary recipe in risk management and avoidable agency problems. Organizations should develop a code of conduct for their directors and executives that promotes ethical and responsible decision making. This code of conduct should be regularly reviewed to meet changing circumstances and strictly enforced to ensure compliance. It is important to understand that reliance by a company on the integrity and ethics of individuals without any framework to ensure same is bound to disappoint. Because of this, many organizations establish Compliance and Ethics programs to minimize the risk that a firm steps outside of ethical and legal boundaries. (E) DISCLOSURE AND TRANSPARENCY

Organizations should clarify and make publicly known the roles and responsibilities of board and management to provide shareholders with a level of accountability. They should as well
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implement procedures to independently verify and safeguard the integrity of the companys financial reporting. Disclosure of material matters concerning the organization should be timely and balanced to ensure that all investors have access to clear, factual information. 5.0 CORPORATE GOVERNANCE IN NIGERIA

As stated earlier, the history of corporate governance in the world is of a recent origin. Prior to 1996 when the first lecture on corporate governance was delivered at Harvard, there was no code of corporate governance principle. The recent collapse of the stock market and uncovering of flagrant abuse of loans and other facilities in the banking sector and the high incidence of corruption in the Nigerian economy generally are enough to pose the question indeed of whether there is a code of corporate governance in this country. The massive fraud and cooking of the books in companies, a notable example of which is Cadbury, not to mention insider dealings and compromised boards in many companies as well as spineless shareholders associations, audit committees and rubber stamp Annual General Meetings suggest the collapse of corporate governance in Nigeria. Investors in Nigeria have lost several billions of dollars through the collusion of accountants and external auditors with companies management and directors to falsify and deliberately overstate companies accounts. As a consequence of unethical practices by accountants and auditors, which have resulted in the distress or occasioned the closure of companies, some indigenous Nigerian Managing Directors of multinational corporations such as Lever Brothers Nigeria Plc, Cadbury Nigeria Plc, Bank PHB Plc, Oceanic Bank Plc, Intercontinental Bank Plc, etc, have been sacked and replaced with new Managing Directors. Some companies placed under receivership have also lost billions of dollars due to professional misconduct by their receivers. Contrary to the claim of protecting the public interest, accountants and auditors may be partly responsible for cases of distress and closure of companies and banking institutions in Nigeria The advent of democratic dispensation in 1999 increased the need for policies that will attract new and sustainable foreign investments. This heralded several reforms including an established commission to review the existence, adequacy and relevance of corporate governance in Nigeria in the light of the international best practices in response to the New International Economic Order (NIEO).
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Thus, the Securities and Exchange Commission (SEC) set up a Committee on Corporate Governance which mid-wifed the first Nigerian Code of Corporate Governance Practice in 2003. The Code adopted with little modifications a unitary board structure reminiscent of the practice in United Kingdom and United States of America with emphasis on identified triple constraints, namely, the role of board of directors and management, shareholders rights and privileges, and the audit committe13. The Code is however voluntary and is designed to entrench good business practices and standards for boards and directors, CEOs, auditors, etc of listed companies, including the banks. The 2003 code was expected to enhance corporate discipline, transparency, fairness and accountability. The goal of the code was to be achieved through the culture of checks and balances where each of the stakeholders is equipped to check all principal actors in the management of the company by ensuring that due process is followed. In 2006, Central Bank of Nigeria issued a Code of Corporate Governance for Banks in Nigeria post-consolidation, which makes compliance thereto compulsory. The key highlights of the SEC and CBN Codes include: (a) Separating the Roles of the CEO and the board chairman; (b) Prescription of non-executive and executive directors on the board; (c) Improving the quality and performance of board membership; (d) Introducing merit as criteria to hold top management positions; (e) Introducing transparency, due process and disclosure requirements; (f) Transparency on financial and non-financial reporting; (g) Protection of shareholder rights and privileges; and (h) Defining the composition, role and duties of the audit committee, etc. The effectiveness of the Code of Corporate Governance Practice, 2003 and Code of Corporate Governance for Banks in Nigeria Post-consolidation, 2006 leaves much to be desired. The intendment of the codes to establish high standards of corporate governance is ideally based on voluntary compliance with the dictates in an environment of transparency and openness. The recommendations in the codes are merely directed at establishing best

19. Oyebode, A. (2009), The Imperative of Corporate Management in Nigeria, Nigerian Village Square

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practice and encouraging pressure from shareholders to hasten its widespread adoption, while allowing some flexibility and initiative in implementation. The recent insider trading, massive and prevalent frauds in the banks and other organizations, mandatory retirement of CEOs of banks, due to corrupt practices and inefficient boards are signposts of the failure of the existing corporate governance structure which the codes have not been able to eliminate or at least minimize. The codes have also failed to enforce or indeed encourage compliance with the Companies and Allied Matters Act enacted to regulate and balance the relationship among the board, shareholders and the management, including other stakeholders. Regrettably also, the absence of enforcement capacity of the codes has fueled the existing insensitivity of the regulatory institutions whose responsibility it is to ensure compliance to the code. The Securities and Exchange Commission (SEC), Central Bank of Nigeria (CBN), Corporate Affairs Commission (CAC) and the Nigerian Deposit Insurance Corporation (NDIC) as regulatory authorities are not empowered under the codes to enforce compliance to the principles. Particularly unattractive is the fact that these institutions are composed of staff with self-interested executives who easily and readily collaborate with companies senior executives to compromise shareholders interests. In utter disregard of the code, Board members are still being picked from the pool of highprofiled retired senior military officers and civil servants without expertise in basic finance and business operations. Expertise and core competence have been so relegated to the extent that the board is often constituted for the sole purpose of perpetuating corrupt practices particularly fixing unreasonable remunerations of senior executives which compromise corporate governance etiquette and decorum14. An instance is the Union Bank Plc staff protest against the management of the bank in February, 2011. In Nigeria, institutional investors are discouraged and not included in governance, and it is not uncommon to bribe some shareholders to rally support for the board and management at annual general meetings (AGM), while oftentimes, the meetings are convened at remote

20. H. A. Quadri, Op. Cit

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locations in an attempt to keep away most shareholders who possess requisite expertise in financial management and business operations. Worse still, members of the audit committees do not generally possess the requisite skill to perform their statutory functions. Thus, the critical role of the audit committees and the shareholders as a check on the management has all but evaporated as a result of the penchant for filthy lucre by all concerned. 6.0 CHALLENGES AND FAILURE OF CORPORATE GOVERNANCE IN NIGERIA

The challenges and failure of corporate governance in Nigeria can be attributed to the pervading culture of corruption and lack of institutional capacity to implement the codes of corporate governance. The common thread that marks monumental corporate failures in Nigeria includes their poor management, fraud and insider abuse by management and board members, poor asset and liability management, poor regulation and supervision, etc. Policy and procedures required to ensure efficient internal controls are disregarded with impunity as non compliance thereto does not invite any pain of sanction. Pathetic also is the lack of managerial training and capacity development among Nigerian business executives to manage business risks which has resulted in avoidable huge agency costs. The incidence of agency costs have always been passed to the shareholders whose investments are tasked as the board of directors neglect to deploy their oversight powers of monitoring agency problems. Also identified as one of the causes of failure of corporate governance in Nigeria is the absence of an effective yardstick to evaluate board and management performance. The board of directors sub-committees are often independent with the attendant effect of compromising the audit and remuneration committees. The auditors/the audit committee of the board have provided the conduit for the perpetuation of fraudulent practices and corrupt enrichment for company executives in return for kick-backs and retention of the audit engagement by big clients15.

21. A. Sanda, et al, Op cit.

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The way and manner corporate governance has been trifled with in Nigeria with one or two private codes formulated at the instance of a few players and bereft of enforcement mechanism smacks of mere declaration of intent to apply principles of corporate governance. of Corporate Governance for Banks in Nigeria Post-consolidation, 2006 issued by the Central Bank of Nigeria; Code of Corporate Governance for Licensed Pensions Operators, 2008 issued by the Pension Commission; and Code of Corporate Governance for Insurance Industry in Nigeria, 2009 issued by the National Insurance Commission. Recently, the Securities and Exchange Commission rolled out New Code of Corporate Governance for Public Companies, 2011 which came into force on the 1st day of April, 2011. The new code sets out the structure, composition, responsibilities and remuneration of the Board; requirements on insider trading, protection of shareholders right, resolutions, risk management, audit committee, accountability, reporting formats, communication policy, code of ethics, statement of business practices, etc. The new Code has not made a radical departure from the previous codes on compliance. Few illustrations will suffice. Section 1.3 (a) provides that

The code is not intended as a rigid set of rules. It is expected to be viewed and understood as a guide to facilitate sound corporate practices and behavior. The Code should be seen as a dynamic document defining minimum standards of corporate governance expected particularly of public companies with listed securities
Similarly, Section 1.3 (b) provides thus;

The responsibility for ensuring compliance with or observance of the principles and provisions of this Code is primarily with the Board of Directors. However, shareholders, especially institutional shareholders, are expected to familiarize themselves with the letter and spirit of the Code and encourage or whenever necessary, demand compliance by their companies
In the same vein, Section 1.3 (g) provides as follows; Where there is a conflict between this

Code and the provisions of any other Code in relation to a company covered by the two Codes, the Code that makes a stricter provision shall apply
It is instructive to note that what Nigeria lacks is not the paucity of laws or regulations to ensure good corporate governance in our corporations. The Companies and Allied Matters Act, Cap C.20 Laws of the Federation of Nigeria, 2004 and other associated laws have
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adequate provisions to ensure transparent corporate regime. CAMA provides that shareholders and other stakeholders should exercise control and direct the affairs of a company. To strengthen the powers of the shareholders, CAMA stipulates certain judicial remedies for breach of directors duties, namely: (a) Action in the name and on behalf of the company if the board of directors refuse or neglect to do so;16 (b) Action in damages and compensation;25 (c) Action in restitution to recover secret profit;26 (d) Relief on grounds that the affairs of the company are being conducted in an illegal or oppressive manner;17 (e) Winding up proceedings on just and equitable grounds;28 (f) Application to CAC to investigate the companys affairs;29 (g) Restoration of the companys property.30 In practice, most of the powers highlighted above have not been effectively activated and utilized by the shareholders as a result of a combination of many factors. These factors include costs of attending meetings, ignorance of the powers available to them, lack of financial muscle to seek redress in court, lack of understanding of reports presented at these meetings and lack of willingness on majority of the shareholders to press the board of directors on issues, etc.

22. S. 63(5) of CAMA, Ladejobi Vs. Odutola Holdings Ltd (2002) 3 NWLR (Pt. 753) 121; S. 303 of CAMA 23. Georgewill Vs. Ekinne (1998) 8 NWLR (Pt. 562) 454 24. S. 280 (2) (a) of CAMA 25. 310 313 of CAMA 26. S. 408 of CAMA, Misfeasance proceedings may be taken under section 507 of CAMA during winding up against directors who have misapplied company funds or are in breach of duty to the company. 27. Ss. 314 and 315 of CAMA 28. S. 284 of CAMA prohibits substantial property transactions involving directors or persons connected to him while section 286 regards such transactions entered by the director as voidable at the instance of the company.

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The snag about corporate failures in Nigeria is the almost total absence of effective framework to enforce compliance. This is more so as the Codes have entrusted the responsibility of ensuring compliance in the hands of the very organ where most corporate shenanigans are committed, the Board of Directors. It shuns the stomach that the Code, in absolving the Commission of every responsibility, has placed onerous duty on the shareholders to demand compliance with the provisions without setting out the modalities of such demand and windows of remedy where the demand is flagrantly ignored, as it is the usual practice in Nigeria. There is no doubt that in Nigeria, the weakest and most neglected organ in a company is the body of shareholders. The powers provided for this organ in the CAMA have not been effectively utilized as a result of the inherent bottlenecks in those provisions 18. One had expected that the new Code of Corporate Governance for Public Companies, 2011 would make adequate provisions to cure the mischief occasioned by the conspicuous lacuna in CAMA on frameworks for enforcement of compliance and also advance the remedy. Pathetic indeed is the fact that the 2011 Code has not comprehensively and exhaustively provided for effective legal framework for corporate governance. It is rather made to give pride of place to other relevant or incidental frameworks with superior contents for corporate governance. If our understanding of a code is anything to go by, a code is a type of legislation that purports to exhaustively cover a complete system of laws or a particular area of law as it existed at the time the code was enacted, by a process of codification. Nonetheless, there are mandatory corporate governance provisions for listed companies, especially banks which are contained in Companies and Allied Matters Act (CAMA), Banks and Other Financial Institutions Act (BOFIA) Cap B3 2004, Investment and Securities Act Cap I24 2004, Securities and Exchange Commission Act (and its accompanying Rules and Regulation). It should be emphasized however, that the failure of corporate governance is, by no means, a peculiarly Nigerian phenomenon. The failure of Northern Rock, HBOS, Freddie Mac, Fanny Mae, Lehman Brothers, Bear Stearns, AIG Investment Bank, Washington Mutual and Wachovia and the Central Bank of Iceland confirms that the need for effective corporate governance is world-wide. That some of the biggest corporate entities General Motors,

29. Ss. 301 313 of CAMA

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Chrysler and Ford also recently manifested symptoms of poor corporate governance, warranting infusion of enormous funds from the US Treasury and loss of managerial autonomy of their boards is an important teaching moment for all those who had believed that bad corporate governance was a Third World disease19.
7.0 CORPORATE GOVERNANCE AND INVESTOR CONFIDENCE

Many investors use their savings, including pension funds, to purchase shares in a company. In Nigeria, for example, there are over twenty million shareholders who own shares in public and private companies33. This figure does not include persons or organizations that own other stakes in public or private companies. They are set to lose a lot in case of financial mismanagement of the company. Therefore, the quality of corporate governance is a key issue to them. The greatest asset of any market is its investors who provide the savings needed for productive investment. It is investors, whether retail or institutional who provide the savings which are needed for productive investment. Therefore, if the investors lose confidence in the conglomerates, the ability of the capital market to mobilize and channel long-term funds which are vital for economic development, will be marred34. The immediate consequence of the loss of faith and confidence of the public has been the current lukewarm attitude of many Nigerians in the stock market. The vast depreciation in the value of stock has veered the investing public away from the capital market to real estate, foreign currencies (forex), gold and more familiar territory like buying and selling of goods. The lull in the stock market has cast a pall on the entire national economy with companies putting on hold plans for IPOs and devising all manner of survival strategies. For example, shrinking profits has meant imminent lay-offs or cut in emoluments of staff lucky to have escaped being thrown into the labour market.

30. A. Sanda, et al, Op cit 31. F. Ajogwu Op cit 32. Ms Arumah Oteh

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Although protecting investors is not an easy task, enacting laws to enforce high standards of disclosure, transparency and corporate governance will minimize investor risk. While corporate laws and regulations may not completely insulate investors against corporate fraud, it sends a message to investors that steps have been taken to protect innocent investors from unscrupulous financial conduct. Good Corporate Governance aids Investors in the following ways; 1) Good corporate governance aids institutional investors get good financial returns. 2) It helps society by taking in social and environmental concerns into consideration. 3) The economy profits from the steady cash flow that sound corporate governance generates. The ideal corporate governance is based on sound economic and ethical principles. Here are some ways to boost the investor confidence through corporate governance: 1) Investor strategies should be responsible and sustainable. 2) Where there is a board of trustees that is responsible for investment, then the trustees should be screened to see if they could offer clean corporate management. Corporate governance is not only vital to the private sector in the economy of any nation. Applying corporate governance practices to government-owned companies will further enhance their credibility; it will also help governments with privatization efforts and accelerating economic reforms. All these are attainable in an environment where code of corporate governance is properly implemented and monitored. Admittedly, the need of the hour is a change in the approach to corporate governance and financial architecture. But it must be emphasized that corporate laws cannot legislate 'integrity' or 'corporate conscience'. We also need competent, knowledgeable people, acting honestly and being prepared to speak out and challenge the corporate rot when occasion demands. 8.0 REGULATORY FRAMEWORK IN CORPORATE GOVERNANCE

Effective corporate governance thrives in an economy with robust regulatory regime. Regulatory governance is also required for interplay of strong market variables. This is because
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a weak market mechanism coupled with frail regulatory governance could potentially delimit corporate governance effectiveness through worsening information asymmetry environment as well as degenerating investor confidence, which will eventually create negative behavioural effect on share prices of underlying firms. Many countries have recognized that the abuse of corporate power cannot be adequately constrained by leaving it to the companys members to ensure that the controllers comply and to take action in the courts if they do not. In countries with weak judicial systems, a regulatory approach to enforcement of corporate governance principles by an independent and strong securities commission can be more effective than judicial enforcement. The Nigerian SEC is vested with power to regulate through its registration requirements and also to discipline listed companies through its power of suspension and revocation of such registration. The penalty usually meted out to listed companies found liable by the Administrative Proceedings Committee (APC) and Investment and Securities Tribunal (IST), all set up by SEC under its powers in Investment and Securities Act, are inadequate to deter companies from risking noncompliance with the relevant laws on corporate governance. The CAC is empowered to appoint investigators to investigate the affairs of the company if an application supported by satisfactory particulars is made by the company or members holding not less than one-quarter of the shares issued. Furthermore, the Commission may appoint investigators to investigate the affairs of the company if a court by an order declares that the affairs of the company ought to be so investigated. Similarly, the Central Bank of Nigeria (CBN) is statutorily empowered under the relevant provisions of the Banks and Other Financial Institutions Act (BOFIA) and the Central Bank of Nigeria Act 2007 to ensure high standards of conduct and management in the banking system. Sections 33 - 35 of BOFIA, concerned with a distressed bank, contain provisions for removal of bank directors and other officers. A failing bank under section 33(1) of BOFIA is a bank which has informed the CBN of its likely inability to comply with its obligations under the BOFIA, an insolvent bank or a bank the CBN has determined to be in a grave situation after carrying out a special examination under section 32. Section 35(2) (c) and (d) provide that the CBN Governor may remove directors, managers and officers irrespective of anything to the contrary in any written law or in a bank's memorandum and articles of association. The CBN
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Governor may also appoint any person as a director or adviser of a failing bank. The reasonable interpretation of section 35, therefore, is that the CBN's power to remove a bank director, whether or not the CEO, is conditional on the bank's status as a failing bank. Despite the impressive powers given the regulatory authorities in Nigeria, the essence which is to ensure good corporate practice is far from being realized. The powers are seldom used and where they are deployed, the result is often inefficient as the process of activating the powers does not guarantee secrecy and element of surprise which are necessary to make the powers potent. The procedure in Nigeria is designed to commence from members of the company, directors or the company itself which in effect would pre-empt the board of the affected company to take casual remedial action or as in most cases destroy or fabricate evidence. In UK, following the amendment of her Company Act20, the Secretary of State is now empowered to direct any company to produce to an officer of his any books and documents prior to the formal appointment of inspectors which appointment will be made if the facts elicited show that a full investigation is needed. This enables an officer authorized by the Secretary of State to arrive without warning at the companys office or wherever else the document is believed to be held and demand for the document.36 The UK position is a remarkable improvement on the provisions of CAMA and other sister laws which require an application to the regulatory institution before a committee of inspectors or special examination committee is appointed to investigate the affairs of the affected company. An amendment in our laws is therefore imperative. Recently, the CBN issued a guideline to banks limiting the tenure of bank Chief Executive Officers (CEOs) to 10 years. The constitutionality or otherwise of the guideline will be examined in another essay. Suffice it to state that, section 2(d) of the CBN Act provides that one of the principal objects of the CBN is the promotion of a sound financial system in Nigeria. Significantly also, section 33(1) (b) of the CBN Act confirms that the CBN has the
33. Gower & Davies, Principles of Modern Company Law 7 Edition, (2003), London, Sweet & Maxwell, page 468; S. 447(2)-(3) of the UK Company Act 1967, as amended by the 1989 Act. 34. Failure to comply is an offence punishable by a fine and criminal sanctions are imposed on any officer of the company who is privy to falsification or destruction of a document relating to the companys affairs or who furnishes false information; Gower & Davies, ibid, page 469.
th

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power to issue guidelines to any person and any institution under its supervision Read with section 2(d), the implication is that the CBN can issue guidelines to any such person and institution while acting in furtherance of the statutory object of promoting a sound financial system in Nigeria. What is more! Tenure limit arguably comes within this purview. Some informed scholars have argued that because banks are private enterprises, there is the need to encourage free enterprise and entrepreneurial spirit instead of interfering in their affairs. We submit, with respect, that insisting that banks are private institutions and their affairs are private is a weak argument. The recent local and global financial crisis, at least, has clearly demonstrated that this argument is spurious and preposterous. It is akin to saying that banking profits are for operators of banks while its losses are community or state-owned. It is evident from the interventions of governments and state agencies including the bailouts of banks and provision of stimulus packages for the economy that banks are not exclusively private institutions. This is also the inference from the fallouts of local and global banking corporate governance failures and other scandals.

9.0

CONCLUSION AND RECOMMENDATIONS

Synoptic analysis of the foregoing reveals that Nigerian companies will be more efficient, effective, responsive and accountable with the observance of good corporate governance values. This is the panacea to ensuring that the corporations contribute to the welfare of the society by creating sustainable wealth, investor confidence, employment, probity and transparency. Hence, strict compliance with the Codes of corporate governance in Nigeria is imperative. It is therefore recommended that the policy framework in Nigeria should reflect the following paradigms: (A) COMPLIANCE AND ENFORCEMENT

Since corporate governance provides rules for board directors and safeguards for stakeholders, it is essential that the regulators monitor compliance through an independent authority. It is necessary to have an integrated approach to any corporate governance reforms. This is against the backdrop of the fact that laws themselves are insufficient without a will and culture at

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senior government and business levels to have them work. Statements of aspirations and good intent are insufficient without strong and robust legal, regulatory and enforcement structures. Regulatory agencies in Nigeria need to evolve clear-cut corporate governance rules and regulations that should be made mandatory for listed joint stock companies. Furthermore, compliance with these rules of corporate governance and their proper implementation need to be strictly enforced. What is needed is Nigeria is a legal framework, monitored and enforced by fully empowered regulatory agencies and not duplication of spineless codes. An integral part of an effective corporate governance regime includes provisions for civil or criminal prosecution of individuals or organizations who conduct unethical or illegal acts in the name of the enterprise and who constitute abattoirs to flagrant abuse of requirements of the code of corporate governance. Breach of the provisions of the Code should be made a strict liability offence with severe penalty. The regulatory authorities should be mandated to apply the sanction on defaulting companies at any relevant time such as during filing of returns. The Policy makers should also evolve a framework that will enable the corporate veil to be lifted more easily where an agent of a company can be proceeded against in the event of aiding and abetting non-compliance with extant codes of corporate governance in Nigeria. (B) BOARD OF DIRECTORS AND ITS COMPOSITION

The responsibilities of the board include balancing the interests of the stakeholders, ensuring that the company performs to high business and ethical standards and providing sound advice to management. By appointing the directors, the shareholders confer power in the board to carry out these functions, subject to existing laws and regulations, the memorandum and articles of association of the companies and the shareholders in general meeting. Thus, every company should be headed by a board that can lead the business and hold the managers accountable. Shareholders should be responsible for electing board members and it is in their interest to ensure that the board of their companies is properly constituted with the right spread of executive, non-executive and independent directors. The proportion and caliber of non-executive and independent members of the board is important in maintaining

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standards of corporate governance. Non-executive and independent directors have the potential to bring an independent judgment to bear on issues. There should be a formal selection process that will reinforce the independence of the nonexecutive directors and for this purpose, a nomination committee should be used. This independence should be reflected in the various board committees. Also desirable is that the Board should be composed in a manner that will reflect core competence and expertise in business operations and financial management. Moreover, directors should undertake some form of internal or external training, at the time of appointment to the board and later on a regular basis. This is particularly important for directors with no previous board experience. The Companies and Allied Matters Act should be amended to reflect the global trend of best practices as it affects directors service contract which should not exceed three years without shareholders approval. Since the new Code lacks capacity of enforcement, it is recommended that terms and conditions of service contracts of directors be provided for and well defined in our positive laws. (C) AUDIT COMMITTEE OF THE BOARD OF DIRECTORS

Audit Committees of all listed companies should be composed of independent directors because of the critical role it plays in ensuring the integrity of the financial management. There should be a minimum of three members of the audit committee. Membership should be drawn from the pool of non-executive directors of the company and a majority of the nonexecutives serving on the committee should be independent. This rekindles the enthusiasm of stakeholders that the value of their investments will be protected. The audit committee should have explicit authority to investigate any matters within its terms of reference, the resources which it needs to do so, and the full access to information. The committee should also be able to obtain external professional advice and to invite outsiders with relevant experience to attend if necessary. (D) ROLE OF THE REGULATORY AUTHORITIES

The global financial crisis of 2008 was an indictment on regulators the world over and laid bare the immense consequences of loose regulation. All systems of internal control in listed
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companies are subject to limitations and weakness. Irrespective of how good the planning of the system, no matter how strict and consistent its application, it may not give perfect protection and safety due largely to human factors e.g. proneness to errors, deceit, collusion between members of staff, etc. In a world class market, the regulators involvement transcends the creation of rules and regulations to enforcement of compliance thereto. The regulatory institutions in Nigeria should be at the forefront of driving the process of entrenching the requisite corporate governance framework to elicit the desired market outcome. Effective regulation with respect to corporate organizations is hinged on 4 pillars: - Clarity of rules - Strengthened Self Regulating Organizations (SROs) - Strong enforcement regimes - Capacity building No framework of corporate governance in Nigeria can achieve a strong market or command investor confidence and public trust if the enforcement machineries are weak. Our greatest strength is in our ability to take enforcement actions without fear or favour and without regard for whose ox is gored. The Securities and Exchange Commission (SEC), Central Bank of Nigeria (CBN), Corporate Affairs Commission (CAC) and the Nigerian Deposit Insurance Corporation (NDIC), governance. There is also a duty on the regulatory organs to properly scrutinize the financial statements of companies. Recent Report on the Observance of Standards and Codes, Nigeria Accounting and Auditing, (ROSC A&A) reveals, amongst other things, that there is multiplicity of laws and bodies for the regulation of accounting, financial reporting, and auditing requirements of companies. However, accounting and auditing practices in Nigeria suffer from institutional weakness in regulation, compliance, and enforcement of standards and rules21 There is should therefore have zero tolerance for corporate and market infractions and indeed any act which could undermine the integrity of the corporate

35. Report on Observance of Standards and Codes, Nigeria Accounting and Auditing (ROSC A&A) of June, 2004. The ROSC Accounting and Auditing (ROSC A&A) review is a joint initiative of the World Bank and the IMF to assess the degree to which an economy observes internationally recognized standards and codes. An overview of the

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therefore the need to improve the statutory framework of accounting and auditing to protect the public interest which of necessity would require amending the Nigeria Accounting Standards Boards Act, 2003. It is necessary also to ensure the regulatory institutions are not composed of self-serving executives of corporations or their cronies. Those to be entrusted with the responsibility of ensuring compliance should declare their interests in any quoted company to ensure a dispassionate enforcement of the provisions of the Code. It is also recommended that these regulatory authorities should overhaul their complaint management systems for better efficiency and alignment with international best practice.

ROSC A&A program and a detailed presentation of the methodology are available at www.worldbank.org/ifa/roscaa

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